Los Angeles Ports Face a Grim Future

Call us old fashioned but financial engineering can only take you so far. For actual economic growth one sometimes needs such old-school components as trade; just ask David Ricardo, who had it right 200 years ago. Yet trade flows over the past 6 months have been collapsing, with both imports and exports taking major hits across the globe.

However, for the best perspective on the sad state of affairs, one only needs to look at the "portal to the west", the (formerly) great ports of Los Angeles and Long Beach.

And if current trends are any indication, a return to normalcy will not occur for at least 3 years, indicating that huge excess capacity will take much longer than expected to be swept out of the system, and the record inventory bounce which everyone is expecting to save future GDP will be much more questionable.

As the ports of Los Angeles and Long Beach post another round of dismal monthly import statistics, a new assessment finds that the nation's busiest seaport complex will need at least four more years to fully recover its momentum -- not to mention the jobs, incomes and revenues that went with it -- after the worst global recession in 60 years.

The recovery will be so slow and painful that a return to the pace set during the economic boom year of 2006 -- when the ports handled 15.8 million cargo containers bound for most parts of the U.S. -- won't come before 2013.

That is the grim conclusion of a new report produced for the local ports but not released to the public.

While public release of the report would be useful to figure out just where the primary weaknesses are concentrated, the take home here is that empty containers will likely be strewn around the harbor for years, generating material downward pressure on that all-important index, the Baltic Dry.

The report indicates that unlike prior recessions which culminated in supply disruptions, while consumer demand was relatively flat, this time, as a function of the credit collapse, the consumer will be unable to deliver the economy as easily, an issue discussed extensively here before.

Among the report's many points is that this recession is far more complicated than the economic downturns following the dot-com bust and the 9/11 terrorist attacks, after which pent-up consumer demand rather quickly returned the economy to relatively normal levels.

This time, no such pent-up demand exists. Instead there has been a fundamental lowering of financial capability, according to the report, produced for the ports by consulting firms Tioga Group and IHS Global Insight.

The report tracks with what economists at the Los Angeles County Economic Development Corp. have been predicting and leads experts there to question whether international trade "will be the big engine of growth that it once was" for the region.

The absence of easy credit also will slow the recovery of international trade, said Jack Kyser, an economist at the business group.

The actual statistics for the biggest West Coast numbers are ugly and getting worse:

Imports at Los Angeles, the nation's busiest port, were down 16.9% to 305,226 cargo containers compared with a year earlier. Overall for the year, traffic is down 15.9% to 3.77 million containers, counting imports, exports and the number of empty boxes that leave the port bound for Asia.

Imports at the nation's No. 2 port, Long Beach, were down even more sharply in July compared with a year earlier, by 18.6% to 221,719 containers. Overall cargo traffic at Long Beach is down 26.8% for the year to 2.77 million containers.

And to add insult to injury to the state which is bankrupt in all but name and continuing to pay with IOUs, the future before the port complex is looking bleaker by the day as seaborne traffic may gradually shift completely away from the harbors, which are among the primary economic drivers for this Top 10 global economy.

But sluggish recovery from the recession isn't the only thing that threatens the amount of business at the two ports.

The report said that a larger number of freight shippers will prefer to move more cargo via a wider Panama Canal channel that is expected to open in 2014, bypassing the Southern California ports' rail connection for moving freight to other parts of the U.S.

The conclusion: hope is the best medicine. While facts indicate that the reality is only set to get worse, pundits hope that hundreds of billions of stimulus will prove to be the driver bailing out the ports.

The one bit of good news from the report is that the massive amount of economic stimulus generated in the U.S. and abroad will slowly begin to have an effect.

"A Great Depression or Japan-style lost decade appears unlikely," the report said. "The forecast calls for a modest recovery in 2010, and a stronger rebound in 2011."

The irony of the one-time (for now) nature of the stimulus is not lost: unfortunately the massive governmental cash injection, as has been observed here and elsewhere, will only restore a fraction of the massive household net worth destroyed over the past several years.

And collapsing trade is not so much a function of direct fiscal intervention as one of normally and efficiently operating economies - something that the world will likely not see for many years.